CBN: Nigeria risks relapse into recession

Nigeria risks a relapse into recession, the Central Bank of Nigeria (CBN) said yesterday.

CBN Governor Godwin Emefiele told reporters at the end of the Monetary Policy Committee (MPC) meeting in Abuja that MPC members were worried that “the exit from the recession may be under threat as the economy slowed to 1.95 per cent and 1.50 per cent within the first and the second quarter 2018”.

The CBN raised a similar alarm in 2015 and 2016 of an impending recession if certain threats to the economy were not addressed.

The economy plunged into recession shortly after from end of 2016 through 2017.

Emefiele said: “The Monetary Policy Committee appraised the microeconomic environment and noted that at its July meeting, modest stability was achieved in key indicators, including inflation, exchange rate and reserves. In particular, relative stability returned to the foreign exchange market, going by a robust level of external reserves with inflation trending downward for the 18th consecutive months. These gains so far achieved appear to be under threat of reversal following the new data which provides evidence of weakening fundamentals.”

This threat to the economy, he said, comes from “rising inflation and pressure on the external reserves created by the capital flow reversal as the current challenges grow”. He noted that the inflationary measure was rebuilding, and “capital flow reversal has intensified as shown by the bearish trend in the equities market even though the exchange rate remains very stable.”

The MPC, Emefiele said, “noted that the slowdown emanated from the oil sector, with strong linkages to employment and growth in the key sectors of the economy”.

The committee urged the government to take advantage of the current rising trend in the oil prices to rebuild fiscal buffers, strengthen government finances in the medium term and reverse the current trend of decline in output growth.

Other threats to the economy, which may aggravate the onset of recession, Emefiele warned, include “the potential impact of liquidity injection from election related spending, and increase in FAAC distribution, which is rising in tandem with increase in oil receipt.”

The Committee “was concerned with the rising level of non-performing loans in the banking system, traced mainly to the oil sector and urged the banks to closely monitor and address the situation.”

Members of the MPC were concerned over the weak intermediation by the Deposit Money Banks and its adverse impact on credit expansion and investment growth by the private sector.

The MPC noted that the economy was still confronted with growth challenges and inflationary pressure but reiterated the need for synergy between the monetary and fiscal authorities as availed option for macroeconomic stability.

The MPC also called on the fiscal authorities “to intensify the implementation of the Economic Recovery and Growth Plan (ERGP) to stimulate economic activities, bridge the output gap and create employment.”

The committee lamented that the threats to the food supply chain in major food producing states due to poor infrastructure, flooding and security challenges may lead to a “rise in food prices, contributing to the uptake in the headline inflation”.

However, the committee was optimistic that as harvests progress, “in the coming months, pressure on food prices would gradually continue to recede while growth enhancing measures would over the medium term, have some moderating impact on food prices”.

The MPC called on the government to fast track implementation of the 2018 budget to help jump start sustainable economic recovery and to facilitate passage of the Petroleum Industry Bill to increase contribution to the overall GDP.

Takeover of Skye bank

On the takeover of Skye Bank and the change of its name to Polaris Bank, Emefiele said: “The strategic health of the Nigerian banking system remains sound. In every chain, there will always be strong points and weak points in a chain, but what we will continue to do is to make sure that that chain remains strong in all aspects of it.”

On Skye Bank, the CBN Governor maintained that he would “love to see a situation where banks are not liquidated, that we have to think outside the box to see how much we can ensure that we have more banks in the country than have less number of banks in the country, and that is what we are doing.”

The situation with Skye Bank, he explained, “is that as at two years ago when the news broke that the bank had slid into negative capital as a result of Non-Performing Loan at that time, we compelled the entire board and executives to resign and they did”.

“After that, before we conducted an internal audit, the hole (financial gap) was about N370 billion .After the forensic audit, it came to the level it was today, which is almost about N800 billion. So what we did was to say that having established a hole at this level, tax payers’ money will be invested in this bank as a loan.

“So we decided that there is a need to let shareholders know, particularly those that have lost their investment, we will try to make sure that small investors remain protected.

“It is for this reason that the name had to be changed from Skye bank to a sexy name, Polaris Bank. The name had to be changed for legal reasons, having got to the point where the Central Bank of Nigeria has invested close to N800 billion in this bank. At some point it must be seen to be owned by the CBN until we find investors that can pay a fair price for the bank. That is the reason why the name had to change from Skye Bank to Polaris Bank.”

On whether Polaris was registered or not before it assumed control of Skye bank, Emefiele said: “The insinuations that the company wasn’t registered is false. It was first of all registered as a limited liability company about three weeks ago and it was registered as a bank on Friday, which is a day before we took that action.

“We should look beyond all that and focus on the real issue, which is that we are embarking on a journey to keep a bank alive, to protect depositors’ monies and also ensure that we don’t throw over 5,000 staff out into the labour market.”

Face off with MTN

On the face off with MTN and four other banks, the CBN Governor explained that it was “important to know that the $8.1 billion is the dollar equivalent of MTN’s naira generated from their profit. So, I would neither call it a fine or a penalty.

“What CBN sought by asking MTN to return that money is that we want a reversal of that transaction because it was not finally authorised by the CBN, and because the fund moved through these four banks, the quantum of dollars that passed through the banks is what we said the banks needed to remit back, or the company needed to remit back to the CBN through the banks,”Emefiele said.

He went on: “It did not mean that these were the banks’ obligation and we understand that there was some interpretation in some quarters that aside from the naira penalty, that there was some conclusion that those dollars attributed to have been remitted by these banks on behalf of MTN were indeed the liabilities of the bank and that is why we provided a clarification to the banks when they called us that the liability is that of MTN and not theirs and that the CBN was not in any position or in any way going to debit the banks for the dollar because it was not their liability.”

Emefiele said he felt vindicated that “in the history of the banking sector, I, at least gave a chance where the regulator, the governor sitting in the meeting, the Director, Banking Supervision, with over 20 examiners sitting in a hall, with the company (MTN) and the banks, asking them to resolve the issue, because we agreed that MTN is an important telecom company in Nigeria.

“After that meeting of May 25, 2018, the discussion was inconclusive. The CBN gave MTN and the banks one week to send documents, but it was not done. But realising the importance of this company, we gave extra two weeks for them to provide relevant documentation to the examiners. Unfortunately, this didn’t happen and we felt that we couldn’t wait indefinitely and that is the reason we released the investigation reports.”

“Right now, they have responded and provided documents which I have sent to the examiners to review. We will go through the pain again to invite the banks and MTN to prove their case, because it is normal that we should allow them to clear themselves and that is what we are doing. I believe that in due course, we should make a final call on this subject.

At the end of the MPC meeting, the committee decided by a vote of seven members to retain the MPR at 14 per cent. However, three of the seven members voted to raise Cash Reserve Requirement by 150 basis points. The other three members voted to raise the MPR by 25 basis points.

The MPC retained the MPR at 14 per cent, retained the Asymetric Corridor at +200 and -500 basis points around the MPR, retained the CRR at 22.5 per cent. However, other members believed that the CRR should be raised to 24 per cent, which actually signaled that they preferred to tighten and to retain the liquidity ratio at 30 per cent.

Before arriving at this decision, the committee identified two likely policy options: tightening or maintaining the status quo ante.

By tightening, it would have tamed inflationary measure, tamed the reversal of portfolio capital, improved the external reserves position and any other position and maintained stability in the foreign exchange market.

Conversely, the committee noted that raising rate would further weaken growth, as credit would become more expensive, non-performing loan will increase further, leading to a deceleration in output.

“In the committee’s opinion, the upward adjustment would not only signal the bank’s commitment to price stability but also its desire to maintain all policy interest rate,” Emefiele said.

A decision to hold all policy parameter, however “will sustain natural improvement in output growth,” Emefiele said, adding: “There is need to maintain the current policy stance and await a clearer understanding of the quantum and timing of liquidity injection into the economy before deciding on possible adjustment.